Humps in the volatility structure of the crude oil futures market: New evidence

Carl Chiarella, Boda Kang, Christina Nikitopoulos-Sklibosios () and Thuy-Duong Tô

Energy Economics, 2013, vol. 40, issue C, 989-1000

Abstract: This paper analyses the volatility structure of commodity derivatives markets. The model encompasses hump-shaped, unspanned stochastic volatility, which entails a finite-dimensional affine model for the commodity futures curve and quasi-analytical prices for options on commodity futures. Using an extensive database of crude oil futures and futures options spanning 21years, we find the presence of hump-shaped, partially spanned stochastic volatility in the crude oil market. The hump shaped feature is more pronounced when the market is more volatile, and delivers better pricing as well as hedging performance under various dynamic factor hedging schemes.

Keywords: Commodity derivatives; Crude oil derivatives; Unspanned stochastic volatility; Hump-shaped volatility; Pricing; Hedging (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Working Paper: Humps in the Volatility Structure of the Crude Oil Futures Market (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:40:y:2013:i:c:p:989-1000

DOI: 10.1016/j.eneco.2013.05.019

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